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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI & SHRI G. PAVAN KUMAR
आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:
The appeals filed by the assessee and Revenue are directed against different orders of the Commissioner of Income-tax (Appeals)-I, Chennai for the above assessment years u/s.143(3) r.w.s.147 and 250 of the Income Tax Act, 1961 (herein after referred to as ‘the Act’). Since the issue in these appeals are common in nature, these appeals are clubbed, heard together, and disposed of by this common order for the sake of convenience.
First, we take up Departmental Appeal No. ITA 2.
No.144/Mds/2015 of assessment year 2002-2003 for adjudication :-
The assessee company is in the business of computer software and investments and filed return of income on 31.10.2012 disclosing loss of �1,88,34,771/-. Subsequently, the return was processed u/s.143(1) of the Act. During scrutiny proceedings, the ld. Assessing Officer found that assessee has received an amount of �3,00,00,000/- from M/s. ACCEL ICIM, a company in which assessee holds more than 10% of shares and voting rights. As per the provisions of Sec. 2(22) (e) of the Act ‘’any loans or advance received from a company in which the assessee holds more than 10% of the shares with voting power, shall be deemed to be dividend taxable under the Act’’ and the ld. Assessing
:- 3 -: 24, 144 to 147/2015.
Officer issued notice u/s.148 of the Act. In compliance the assessee filed letter dated 18.02.2009 to treat that the original return filed as return filed in response to notice. The ld. Assessing Officer issued notice u/s.143(2) of the Act and the recorded reasons for reopening the assessment and communicated to the assessee and the assessee filed letter dated 12.03.2009 objecting to the reasons of reassessment proceedings and applicability of provisions of deemed dividend u/s. 2(22) (e) of the Act. The ld. Assessing Officer in assessment order at page Nos.3 to 5 has dealt on the provisions of deemed dividend and facts of the case. The assessee has filed detailed explanations by letters dated 12.03.2009 and 09.09.2009 referred at para 3.3. of the order as under:-
‘’a) The said sum was already taxed as dividend u/s.2(22)(3) of the Act for assessment year 2004-05. b) During the year, relevant to the impugned assessment year, the assessee company gave a corporate guarantee in favour of its subsidiary company to the financial institutions in order to mobilise financial resources for the subsidiary company. The assessee company insisted that its subsidiary keep a security deposit with it for giving such coporate guarantee to the financial institutions. (c) The loan given is purely a business transaction which has taken place in the normal course of business.
(d) The assessee company has been receiving interest on the loan given. (e) The assessee company and its subsidiary are public limited companies and therefore, the provisions of section 2(22)(e) are not applicable’’.
:- 4 -: 24, 144 to 147/2015.
The ld. Assessing Officer based on the submissions and facts of the case placed reliance on the orders of High Court including jurisdictional High Court made a exhaustive analysis and treated the transactions as deemed dividend u/s.2(22)(e) and observed at para 3.4.3 of his order as under:-
‘’3.4.3 The submission of the assessee that the payment has been made during the normal course of business of the assessee and therefore, should not be brought within the ambit of provisions of section 2(22)(e) cannot be accepted. The payment has not been made in consideration for any goods supplied or services rendered. The amount given, as admitted by the assessee is refundable and is also carrying interest. Such being the case, it cannot be said that it has been paid as consideration for supply of any goods or services. That being the case, the plea of the assessee that the transaction has happened in .the normal course of business is untenable. 3.4.4 The assessee has also submitted that itself and its subsidiary company are public limited companies and therefore, the provisions of section 2(22)(e) would not be applicable to them. The provisions of section 2(22)(e) are not applicable only to companies in which public are substantially interested. A public limited company would become a company in which public are substantially interested only if its shares are listed in a recognised Stock Exchange in India or not less than 50% of its shares are allotted unconditionally to the Government or a Corporation established by a Central, State or a Provincial Act. In the instant case, though the assessee and its subsidiary are public limited companies their shares as on the date of the loan were not listed in any recognised Stock Exchange. Also, not less than 50% of the shares have not been allotted to Government or any Corporation as prescribed. To clarify further at this stage, the assessee company was holding 92.43% as on 1/4/2011 and 61.24% as on 31/03/2002 of the shares in the assessee's subsidiary company M/s. Accel lCIM Systems and Services Limited. Therefore, the assessee's argument
:- 5 -: 24, 144 to 147/2015. that they are public companies and therefore provisions of section 2(22)(3) are not applicable to them is invalid. Based on the above discussion, the amount of loan received by the assessee company from its subsidiary company amounting to ₹3 Crores is brought to tax as dividend u/s.2(22) (e) of the Act and added to the assessee’s returned income’’.
Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).
In the appellate proceedings, assessee challenged the applicability of deemed dividend proviso and other grounds. The ld. Commissioner of Income Tax (Appeals) has considered the facts, written submissions, judicial decisions and relied on the decision of Tribunal in assessee’s own case in dated 11.09.2009 observed at para 5.2 of his order as under:-
5.2 I have carefully considered the facts of the case and the submission of the Id. AR. I have gone through the decisions relied on by the Id.AR and the AG. As per the provisions of s.2(22)(e), if any advances or deposits are given by a subsidiary company to a holding company which is having shares of more than 10% in such subsidiary company, such advances or deposits given by the subsidiary company will be treated as deemed dividend since such advances or deposits will be directly benefitting to the holding company. The legislatures have brought in this provision to arrest the indirect ways of benefitting the holding company without declaring dividends in the hands of holding company and without paying dividend tax by such companies. Such transactions were treated to be deemed dividends which were given in the garb of loans and deposits. However, it was clarified by several Courts that these provisions cannot be applied indiscriminately especially when such advances were given out of business contingency. In the instant case, the facts are different. Firstly, the advances I deposit were kept
:- 6 -: 24, 144 to 147/2015. by the subsidiary company with the appellant company as a security since it stood guarantee with its own assets to the bank (ICICI Bank) which has advanced loans to the subsidiary company. Therefore, it is a business requirement. Secondly, the subsidiary company has declared dividends and paid ₹325.97 lakhs to the appellant company during the year. The details of such payments over a period of time are as under:
Accounting Dividend Dividend Accel Ltd PAT Remarks Year % (� Lacs) Holding % (� Lacs) 1998-99 100 80.00 100.00 93.94 1999-00 150 120.00 100.00 893.93
10 43.50 92.43 901.18 2000-01 2001-02 50 325.97 61.24 599.19 @ 2002-03 5 65.00 61.24 204.19 TOTAL 634.47 2692.43 Note
(*)' Dividend amount is excluding the Tax thereon. '@' AICIM had also issued Bonus Shares in the ratio of 1: 1. Note: The Cumulative Dividend payout of RS.634.47 lacs for the 5 years is around 23.56% of the PAT. Thirdly, the appellant company has paid interest of 1 % more than the bank rate on the security deposit kept with it by the subsidiary company. Therefore, the deposit kept with the appellant cannot be taken as deemed dividend. The interest paid by the appellant to its subsidiary company for F.Ys 01-02 to 03- 04 are as under:
Financial Year Amount in Rupees 2001-02 47,78,119 2002-03 66,60,002 2003-04 49,36,250 Total 163,74,371
5.2.1 It is also noticed that similar disallowance was made by the AO
:- 7 -: 24, 144 to 147/2015. for AY. 04-05 including RS.3 crores which is a subject matter of discussion for the present assessment year and my Id. predecessor, after a comprehensive analysis of the facts, had held that Sec. 2(22)(e) provisions will not attract the appellant's case since the advance / deposit has arisen out of business contingency for the same facts and circumstances discussed above. His conclusions at para 20.4 are reproduced for ready reference as under:
"20.4 . . .. . . . . .. . . Now in the instant case, as discussed above, security deposit was taken as a security by the appellant company for providing the corporate guarantee and the equitable mortgage of its immovable property, especially after the dilution of its stake in the subsidiary company from 100% to 61.24%. Naturally, when outsiders have also become stakeholders in the subsidiary company, the appellant has every right to protect its interest by seeking such security deposit. Without that corporate guarantee and equitable mortgage, the subsidiary company would not have got bank loan/credit facility. Hence, it was the business requirement which necessitated that the appellant company should give the requisite guarantee against the security deposit which is also interest-bearing with a rate which is 1% higher than the bank rate. Hence, it cannot be treated as deemed dividend given under the garb of loan. Similar is the case with reimbursement of expenses and the advances provided by the subsidiary companies in the regular course of business as explained by the AR as discussed above. Hence, I do not find that the action of the AO is justified and direct him to delete the addition made u/s 2(22)(e). For the same reason, his request for enhancement is also rejected.
On appeal by the department, the ITA T has made an observation that the CIT(A) has dealt the issue elaborately and do not want to interfere with the decision of the CIT(A). The operative part of ITAT at paras 7.1 to 8 are reproduced as under:
'7. 1 In view of the facts and circumstances discussed in the above paragraphs, the closing credit balance of Rs.4, 16, 12,082 /-cannot be said to represent a :- 8 -: 24, 144 to 147/2015.
'payment', made by the assessee-company to its subsidiary during the previous year relevant to AY 2004- 05, within the meaning of section 2(22)(e) of the Act. And on this ground alone the impugned addition of Rs.4, 16, 12,082, made in AY 2004-05, becomes unsustainable. We hold accordingly.
8. We like to make it clear that we have not gone into the correctness or otherwise of the other reasons, given by the CIT(A) in his order, for deleting the above addition.
5.2.2 From the above discussion, I hold that the provisions of s.2(22)(e) are not attracted in appellant's case. I also agree with my Id. predecessor who has already decided the issue in favour of the appellant for AY 04-05 vide his ·order in dated 28.5.08 on the same issue including RS.3 crores which is the subject matter of addition for the present assessment year which was also confirmed by the ITAT in its order in ITA NO.1825/Mds/2008 Dated 11.09.2009. Therefore, I direct the Assessing Officer to withdraw the addition made by him. The ground is allowed. and directed the Assessing Officer to delete the addition and allowed the appeal. Aggrieved by the order of Commissioner of Income Tax (Appeals), the Revenue has assailed an appeal before Tribunal.
Before us, the ld. Departmental Representative argued the grounds and relied on the findings of the Assessing Officer and further the Commissioner of Income Tax (Appeals) has erred in deleting the disallowance as the assessee is having substantial interest and relied on Tribunal decision of assessee’s own case for the assessment year 2004-05. The Revenue has not accepted the decision of Tribunal and appeal has been filed in jurisdictional High Court and prayed the order
:- 9 -: 24, 144 to 147/2015. of Commissioner of Income Tax (Appeals) be set aside and order of Assessing Officer is restored.
Contra, the ld. Authorised Representative relied on the order 5. of Commissioner of Income Tax (Appeals) and Tribunal decision of assessment year 2004-05 in assessee’s own case. The assessee also filed written submissions, paper book and Tribunal order for earlier assessment year and alongwith sanction order of bankers and correspondence between both the companies in respect of providing security deposits and offering of collateral securities and pleaded for dismissal of Revenue appeal.
We heard the rival submissions, perused the material on record and judicial decisions cited. The ld. Departmental Representative contention that the Commissioner of Income Tax (Appeals) has erred in deleting the deeming dividend without considering the facts that the assessee company has share holding and substantial interest in the financial aspects of the company. The only disputed issue that the Commissioner of Income Tax (Appeals) has dealt based on the thorough financial analysis of the earlier years were the assessee is having regular business transactions on commercial expediency and dealt with subsidiary company and the :- 10 -: 24, 144 to 147/2015.
payments, on terms of commercial transactions, The ld. Commissioner of Income Tax (Appeals) relied on the Tribunal decision on assessee’s own case for the assessment year 2004-05 in dated 11.09.2009 on the same issue. The contention of the Department before the Tribunal that the Revenue has not accepted the order of Tribunal and an appeal has already been filed in Madras High Court and the same is pending. This Tribunal is of the considered opinion that mere pendency of appeal before High Court cannot be a reason to take a different view. The order of Tribunal is binding on all the authorities in the State of Tamil Nadu and Union Territory of Pondicherry. The Commissioner of Income Tax (Appeals) has allowed the claim of the assessee.
Considering the apparent facts, we do not find any infirmity in the order of the Commissioner of Income Tax (Appeals) and uphold the same and dismiss the appeal of the Revenue.
In the result, the appeal of the Revenue in is dismissed.
Now we adjudicate the Departmental appeals and 147/Mds/2015 of assessment years 2007-08 and 2008-09. Since the issue in these appeals is common in nature, we take up ITA No. 146/Mds/2015 of assessment year 2007-08 for adjudication:-
:- 11 -: 24, 144 to 147/2015.
The Department has raised the following grounds:- 9.
‘’2. The learned CIT(A) erred in directing the AO to verify whether the amounts written off in the books are reduced from the debtors on the assets side of the balance sheet and to allow the expenses on such verification.
The learned CIT(A) ought to have appreciated the fact that the investments made in Mjs.Accel Systems Group Inc (ASG) appears under the head 'Investments' and not under 'Sundry Debtors'.
2.1 The learned CIT(A) failed to appreciate that any loss in trading of investments must be treated under the head 'Capital Gains' and not under the head 'Income from Business or Profession'. Moreover the assessee has debited the diminution expenses to the P&L Account treating the same as loss even when the number of shares remains to same.
2.2. The case laws relied on by the CIT(A) do not apply to the facts of the case and are entirely on a different footing. In the case law of ITO vs. TCFC Ltd 10 Taxmann 144 (2011), it has been held that the provisions for diminution need to be added back for computation of book profits. In the case of Ashok Leyland Ltd vs DCIT (2014) 47 Taxmann.com 414 (Chennai Tri.) it was held that diminution in value of assets is not an admissible expenditure for computing income of assessee when assets are held as investment, question of diminution in value arises only in the case of assets held by an assessee in the form of stock in trade.
The grounds raised on sole disputed issue that the 10.
Commissioner of Income Tax (Appeals) has directed the Assessing Officer to verify the diminution of value of investments. The assessee company has filed return of income for the assessment year 2007-
:- 12 -: 24, 144 to 147/2015.
2008 on 30.10.2007 with declaring loss of �1,64,01,645/-.
Subsequently was processed u/s.143(1) of the Act and the case was selected for scrutiny and notice u/s.143(2) of the Act was issued. In compliance to notice, the ld. Authorised Representative of assessee appeared and filed details. The Assessing Officer in the assessment proceedings found that assessee has claimed �2,39,87,314/- as diminution in value of investments made in subsidiary M/s. Accel Systems Group Inc. (USD 50 million to USD 26 million) as the assessee being a investment company claimed loss in diminution of value were operations are with subsidiary and associate companies. The company holds 21,66,000 equity shares of M/s. Accel Systems Group and were reflected in the financial statements under schedule-V investment unquoted at cost. The company has been following the systematic approach for investments operations and due to dire necessity of reduction in value of shares in USA. The assessee similarly reduced value of investments in India without any sale of shares. The Assessing Officer relied on the financial statements and ascertained that the shares were held under schedule of investments as long term and there is no transfer or purchase or sale of shares and the reduction in value has characteristic of capital loss and not eligible for deduction. The ld. Assessing Officer further alleged that the diminution in value is only provisions in the books of account forecasting the :- 13 -: 24, 144 to 147/2015. future loss were such provision is created as per accounting policies and same cannot be allowed. The provision for diminution in value of asset is not allowable while calculating Book profits u/s.115JB of the Act and the same cannot be allowed under normal computation of income. With these observations, the ld. Assessing Officer has disallowed the claim. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).
In the appellate proceedings, the ld. Authorised 11.
Representative submitted that diminution in value of investments is admissible under provisions of Act for determination of assessable income and the action of the Assessing Officer is bad in law. The ld. Authorised Representative argued the grounds and also reiterated the submissions and the findings of the Assessing Officer on the diminution in value of investments. The ld. Assessing Officer is of the opinion the diminution of value is an provision and cannot be allowed as deduction. The ld. Authorised Representative further submitted that the company is a investment company with business operations in BPO activities. The main source of income of the company being income from BPO operations, interest income, rental income and exempted dividend income as per schedule 7 of profit and loss account. The assessee has claimed the loss of diminution in value of investments under the head advances not recoverable and written off. The :- 14 -: 24, 144 to 147/2015.
Commissioner of Income Tax (Appeals) considering the grounds, submissions and findings of the Assessing Officer has observed the claim made by the assessee is not provision but actually written off in profit and loss account at page 5.2 of the order as under:-
‘’5.2 I have gone through the facts and circumstances of the case. The AO has disallowed an amount of RS.2,39,87,314 under normal computation and computation u/s 115JB holding that the amount is a provision debited to P&L under the head "'diminution in the value of investments". Since the provisions are unascertained liabilities they are not allowed to be claimed as expenditure either in normal computation or in the computation u/s 115JB. However, in the instant case, the facts are different. As per balance-sheet, the provisions were shown at Schedule 10 as under: ₹1,02,310 Provisions Sch.10 On the other hand, the amount debited in the P & L is as under:- Advances not recoverable written off/ Diminution In value of investments ₹2,39,87,314/-
The above details show that the claim made by appellant is not out of provisions but the amount which is actually written off in its P&L a/c. As per the decision of the Hon'ble Supreme Court in the case of TRF Limited (323 ITR 397) (SC) w.e.f. 1.4.89 the moment the bad debts are written off in the books of the appellant they should be allowed as such. As per the provisions of s.36(1 )(vii) and its Explanation read combinedly gives a meaning that any amount of bad & doubtful debts written off in the books of :- 15 -: 24, 144 to 147/2015. the appellant as irrecoverable can be allowed as an expenditure but not the provisions' for such bad & doubtful debts. It is also decided in the case of Yokagowa India Ltd reported in 204 Taxman 305 (Kar.) (2012), that the said amount not only to be debited in P&L alc but simultaneously also reduce the loans and advances or the debtors from the asset side of the balance-sheet. The Id.AR has not furnished any details to show that the amount off in the books are reduced from the from the debtors on the assets side of the balance sheet. I therefore, direct the Assessing Officer to call for the details allowed as diminuition in the value of investments for normal computation as well s computation u/s.115JB. The ground is allowed for statistical purposes. and directed the Assessing Officer to verify the facts and allowed the grounds of the assessee for statistical purpose. Aggrieved by the Commissioner of Income Tax (Appeals) order, the Revenue has assailed an appeal before Tribunal.
Before us, the ld. Departmental Representative has agitated that the Commissioner of Income Tax (Appeals) has erred in directing the Assessing Officer to verify the sundry debtors but the assessee has actually written off in the books the investments made in subsidiary company M/s. Accel Systems Group Inc. , USA from 50 million USD to 26 million. The ld. DR also filed written submissions and highlighted the disputed issue as there is no sale of shares. The ld. Commissioner of Income Tax (Appeals) has misconceived the facts
:- 16 -: 24, 144 to 147/2015. that the amount written off as bad debts were there is no element of debt except investments and relied on the decision of CIT vs. Lal Woolen and Silk Mills (P) Ltd 333 ITR 254 and referred to the clause 13, of report were opinion expressed by the statutory Auditors as under:-
“In our opinion, the company in not dealing or trading in shares, securities, debentures and other investments. Accordingly, the provisions of Clause 4(xiv) of the Companies (Auditor’s Report) order 2003 are not applicable to the company’’.
Further, the Commissioner of Income Tax (Appeals) has erred in making observations that assessee has deducted the amount from profits before taxation and relied on the decision of Kerala High Court in the case of Kerala Small Industries Development Corporation Ltd vs. CIT 270 ITR 452 and prayed for setting aside the Commissioner of Income Tax (Appeals) order.
On the other hand, the ld. Authorised Representative relied n 13. the order of Commissioner of Income Tax (Appeals) and argued that assessee is a investment company and carrying out its operations through its subsidiary and associate companies and claimed the reduction in value of investments as allowable expenditure and prayed for dismissing the Revenue appeal.
:- 17 -: 24, 144 to 147/2015.
We heard the rival submissions, perused the material on record and judicial decisions cited. The only substantial ground alleged by the Revenue that the assessee is not entitled for claim of diminution in value of investments as Revenue expenditure by debiting to profit and loss account which takes the characteristic of capital in nature. Further, the ld. Commissioner of Income Tax (Appeals) assumed treating on par with Sundry Debtors and written off as Bad debts in the books of account. The decisions relied are applicable to the bad debts and not for investments. The ld. Authorised Representative supported the orders of Commissioner of Income Tax (Appeals) and drew our attention to the Annual Report were the assessee reflected claim in the profit and loss account alongwith other income as assessee company being a investment company are entitled to claim losses. The ld. Commissioner of Income Tax (Appeals) considered the findings of the Assessing Officer and the assessee submissions and exhaustively dealt on the matrix of claim as not a provision but actual claim in the books and relied on the Apex Court decision and gave directions to Assessing Officer to verify the claim.
We on perusal of the Audit report and schedules found shares as long term investments in other companies. We are of the opinion, if debts are written off u/s.36(i)(vii) of the Act than it should be considered as Business loss. On the other hand, the investment is written off it
:- 18 -: 24, 144 to 147/2015. should be treated as Capital loss. The ld. Commissioner of Income Tax (Appeals) has confused the facts and treated investment as debt in the normal course of business. We are not in a position to appreciate the reasons given by the ld. Commissioner of Income Tax (Appeals) and also the facts brought on record by the lower authorities are not sufficient to adjudicate the disputed issue. Therefore, we set aside the order of Commissioner of Income Tax (Appeals) to the file of Assessing Officer for fresh consideration.
In the result, the appeal of the Revenue in ITA 15.
No.146/Mds/2015 is partly allowed for statistical purpose.
The ground raised in Departmental appeal in ITA 147/Mds/2015 for assessment year 2008-2009 that the assessee claimed loss on account of diminution in value of investments �4,30,54,755/-.
We have considered the facts and submissions made by the 17. ld. Authorised Representative and Departmental Representative, on similar issue was adjudicated by us for the assessment year 2007-08 in at para 14 and we partly allow the ground of the Revenue for statistical purpose.
In the result, the appeal of the Revenue in ITA No.
147/Mds/2015 is partly allowed for statistical purpose.
:- 19 -: 24, 144 to 147/2015.
We take up assessee appeal in of assessment year 2009-2010:- The assessee has filed e-return of income on 28.09.2009 admitting total income of �4,82,650/- and the case was selected for scrutiny and notice u/s.143(2) and 142(1) of the Act was issued. In compliance to notices, the ld. Authorised Representative of assessee appeared from time to time and filed details. The ld. Assessing Officer found that assessee is in the business of providing authorized services for IT products and also a investment company. During the financial year the assessee has not generated any income from business operations but derived rental income from property �69,26,658/-. The ld. Assessing Officer has not allowed the claim of expenditure against the rental income as no business operations were carried but computed the rental income and allowed standard deduction u/sec. 24 of the Act and made other addition and determined assessed income of �1,40,95,061/-.
Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).
In the appellate proceedings, the ld. Authorised 20.
Representative has raised five grounds on the issue of duplication of treatment of long term capital gains by Assessing Officer and Municipal taxes payment. The assessee has filed petition u/sec. 154 of :- 20 -: 24, 144 to 147/2015. the Act and was allowed by the Assessing Officer vide order dated 3rd February, 2012. Hence the assessee has not pressed two grounds. The ld. Commissioner of Income Tax (Appeals) observed on the findings of the Assessing Officer that no income has been generated by way of business operations. Therefore administrative expenses of �39,64,486/- and interest expenses of �3,29,494/- are disallowed.
The ld. Authorised Representative submitted that there is no justification by the Assessing Officer as the assessee is a investment company and other operations have been transferred to Sister and Subsidiary companies and the administrative expenses are bifurcated.
The assessee also claimed deduction of diminution in value of investments �27,80,700/-, which includes �19,80,000/- paid for share warrants subscription for shares in associate company M/s. Accel Transmatic Ltd, being BSE listed company. However, due to market value of the shares being less than the subscription price the share issue could not materialized and amount paid for acquiring was written off as investment activity in the books as per terms of offer and SEBI guidelines. The remaining �8.01 lakhs being investment in subsidiary company M/s. Accel Tele Net Ltd and considering the Auditors observations and impairment the investments the value was written off. The ld. Commissioner of Income Tax (Appeals) considered the submissions on the claim and has dealt meticulously on the nature of :- 21 -: 24, 144 to 147/2015. expenditure as no income was obtained during the previous year from business activity. The Assessing Officer has disallowed entire expenditure and ld. Commissioner of Income Tax (Appeals) concurred with the observations of Assessing Officer of separately taxing rental income and the disallowance and upheld the order of Assessing Officer. Aggrieved by the Commissioner of Income Tax (Appeals) order the assessee has assailed an appeal before Tribunal.
Before us, the ld. Authorised Representative reiterated the 21. submissions made in assessment and appellate proceedings and argued that the Commissioner of Income Tax (Appeals) should have allowed the claim of expenditure in the nature of administrative though there is no income from BPO operations and the company has written off 10% of share issue price paid and the same could not be converted into shares on account of fall in price of shares. Further, the ld. Authorised Representative has raised two new grounds to allow investments made in the assessment year 2005-06 against the sale of investment in current year. Similarly, advances given to the subsidiary company of �46,96,537/- in assessment year 2005-06 was not allowed and know claimed on account of sale of company and prayed for allowing the appeal.
:- 22 -: 24, 144 to 147/2015.
On the other hand, the ld. Departmental Representative relied on the order of Commissioner of Income Tax (Appeals) and findings of the Assessing Officer and strongly opposed to the new grounds raised, does not arise out of assessment order and prayed for dismissing the appeal.
We heard the rival submissions, perused the material on 23. record. The ld. Authorised Representative contention on the claim of expenditure that the ld. Assessing Officer has not allowed any claim of expenditure though there was some activity in the company and the income being in the nature of rental income, income from capital gains and income from other sources and also raised grounds to allow claim of write off of investments made in the year 2005 as against the sale in current year and also for advances provided to subsidiary company by the assessee in the same year. The arguments of the ld. Authorised Representative are not convincing and further on perusal of assessment records these contentions never raised in assessment proceedings as the Assessing Officer passed the order on the claim of expenditure, rental income and capital gains only. The write off of investments and advances to subsidiary claim are not emanating from the assessment order. Therefore, we are not inclined to adjudicate the fresh disputed issue and remit the entire file to the Assessing Officer
:- 23 -: 24, 144 to 147/2015. who shall verify and examine the claims. Since we have remitted the entire file to the Assessing Officer for fresh consideration, the other grounds are linked with the disputed issue. Therefore, other grounds are also remitted to the Assessing Officer for verification.
In the result, the appeal of the assessee in ITA 24.
No.24/Mds/2015 is allowed for statistical purpose.
Assessee appeal and Departmental appeal ITA No.145/Mds/2015 of assessment years 2005-06:- These cross-appeals filed by the Revenue and assessee arise from common order of the Commissioner of Income Tax (Appeals)-I, Chennai dated 29.09.2014 passed in ITA No.483/07-08/A-I, for the assessment year 2005-2006, in the proceedings under section 143(3) of the Income Tax Act 1961 [in short the “Act”].
First, we take up assessee appeal in 26. of assessment year 2005-06 for adjudication.
The assessee has raised the following grounds:-
“4. The Commissioner of Income Tax(A) should have accepted and allowed the write off the investments amounting to �45,00,000/- in a subsidiary company considering the impairment of assets and the erosion of the networth of the subsidiary company
:- 24 -: 24, 144 to 147/2015.
The Commissioner of Income Tax (Appeals) should have considered company's contention for writing off of advances of Rs,46,96,537/- given to the subsidiary and such advances being not realizable and allowed the write off 6. Expenditure claimed by the company towards interest and other financial charges as normal business expenses as there is no dispute from the assessing officer that these expenditure have not been incurred. The Commissioner of Income Tax (Appeals) was also wrong in restricting the expenditure on percentage basis’’.
In the assessment proceedings, the ld. Assessing Officer 28. found that the assessee has claimed �45,00,000/- as advance written off in the profit and loss account. The company has invested in equity capital of 100% subsidiary M/s. Accel Technologies Pvt. Ltd and provide advance to the subsidiary company for working capital requirements. The subsidiary company failed to take offand not carried out any business operations and the assessee company has claimed written off in the books of account. The ld. Assessing Officer observed at these investments and advances have been given from the 'capital fund of the assessee company. The loss arising from the non-recovery of the same will only result in a capital loss which cannot be allowed while computing the income of the assessee under the head 'Business'. The assessee is engaged in the business of trading in computer components, spares and accessories. The advances given
:- 25 -: 24, 144 to 147/2015. by the assessee and written off cannot be allowed u/s.36(2) of the Act or under section 37 of the Act. As per the provisions of section 36(2), deduction with regard to bad debt would be allowed only if the said sum had boon recognised as income in any of the earlier years or it represented money lent in the ordinary course of banking or money lending business. In the instant case, the advances given are in the nature of a loan given to meet the working capital requirements of the assessee's subsidiary company. Such sum, had never been considered as the assessee's income in any of the earlier years. Also, the assessee is not engaged in the business of money lending or banking. Such being the case the assessee's claim cannot be allowed u/s.36(2) of the Act. Since such advances given are in the nature of a loan any loss, on account of its irrecoverability will only represent loss of capital. Therefore, it cannot be allowed u/s 37 of the Act as well, As regards the investments written off by the assessee. the same will also represent loss of its capital which cannot be allowed under any of the sections under the head 'Business' also, the loss cannot be allowed under the head 'Income from Capital Gains' since it has not arisen as contemplated u/s 45 of the Act and no "transfer’ as defined in the Act is involved. Such loss would only represent loss of capital of the assessee company and though a capital loss, it cannot be allowed to be carried forward under the head
:- 26 -: 24, 144 to 147/2015.
'Capital Gains'. In this regard, the ld. Assessing Officer placed reliance on the placed on the following decisions:
(i) Vania Silk Mills Private ,Limited vs. CITT 191 ITR 6 (SC)
(ii) CIT vs. R. Chidambaranatha Mudailiar [240 ITR 553 (MDS)] On the basis of the above, the advances and investments written off by the assessee to extent of �45,00,000/- and �46,96,537/- are disallowed and added to the assessee income. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).
The ld. Commissioner of Income Tax (Appeals) considered the submissions of the ld. Authorised Representative and the grounds also findings of the Assessing Officer. Further ld. Authorised Representative explained that the assessee has followed Accounting Standards for Accounting of impairment assets and written off advances and investment in subsidiary companies . The ld. Commissioner of Income Tax (Appeals) considered the submissions on the accounting standards and a elaborately discussed at para 4.2 of his order and dismissed the ground as under:-
4.2 I have carefully considered the submissions filed by the appellant. The appellant holding that it being an investment company, claimed that the loss arisen due to investments and :- 27 -: 24, 144 to 147/2015. advances given to its subsidiary company whose business has not taken off and became defunct should be allowed as a business loss. I do not agree with this contention of the appellant. Even though the appellant is claiming it as an investment company in the statement of facts filed before me, it was mentioned that "the appellant is carrying on business of trading in computer components, spares and accessories". For the same year business cannot be Changed. If it is an investment company the profit or loss from its investments should be offered for taxation under capital gain or capital loss. Only if there is any capital loss on transaction or sale of assets, the same can be set off against capital gain but there is no provision for write off of losses from the activity of investment company. Therefore, this possibility is ruled out. As per s.45 transfer of the capital asset is sine qua non for claiming capital gain or loss. Whatever may be nature of business, it is evident that the appellant has not incurred any loss on transaction made by it in the form of transfer or sale of its shares with its sister concern. Therefore, in my considered opinion, loss incurred due to investment in sister concern which went defunct cannot be allowed to be written off. With regard to, advances, if there is a loss on non-recovery of advances given which has no relation with regular trading activity between the two companies such loss cannot be allowed to write off as revenue expenditure. Such loss can also be not allowed as capital loss since there is no transfer of asset. The advance given to the subsidiary company is only for working capital requirements of that company which has not arisen out of any business contingency, therefore the loss arisen out of such transaction cannot be allowed to write off as business loss. The jurisdictional High Court in the case of R. Chidambaranatha Mudaliar (supra) relied on by the AO which reads as under is quite relevant in support of his decision.
Section 74 of the Income-tax Act, 1961 - Losses - Under the head 'Capital gains' - Assessment year 1975-76 - Whether loss incurred by assessee on an unrealised deposit could not be termed as a capital loss under section 45 as same had not arisen by transfer of any capital asset, which was a pre- condition for loss to be treated as capital loss, thus, such a loss could not be carried forward and set off against capital gains of subsequent years - Held, yes."
:- 28 -: 24, 144 to 147/2015.
4.2.1 In view of the above, the disallowance made by the AO with regard to business loss relating to investment in equity shares and advances given by. the appellant to its subsidiary company are confirmed. The ground is dismissed.’’ Aggrieved by the Commissioner of Income Tax (Appeals) order, the assessee has assailed an appeal before Tribunal.
Before us, the ld. Authorised Representative of assessee agitated the grounds raised and also reiterated the submissions of assessment and appellate proceedings. The assessee company being investment company and investments are made in subsidiary companies but due to loss in business operations of subsidiary companym this amount could not be recovered and investments has not yielded any profits and claimed write off and prayed for allowing the deduction.
Contra, the ld. Departmental Representative relied on the orders of lower authorities and opposed to the grounds.
We heard the rival submissions, perused the material on 32. record. The ld. Authorised Representative contention that investments in shares of the subsidiary company �45,00,000/- of M/s. Accel Technologies Private Limited with 100% share holding was on :- 29 -: 24, 144 to 147/2015. commercial expediency and advances are provided to subsidiary company for working capital. The assessee being a investment company could not recover the value of investments in subsidiary company as operations are discontinued and values are negative.
Further advances are doubtful for recovery and claimed deduction u/s.37 of the Act. The ld. Counsel filed written submissions, supported his arguments with judicial decisions and principles of accounting gave a note of write off in diminution of value of investment at page 4 of paper book and the Accounting standards of ICAI were the loss has to be charged to Profit and Loss account and discussed elaborately on the financial statements. The assessee has claimed write off of advances made to the subsidiary company referred at page 6 of paper book and relied on the decisions of jurisdictional High Court were advances are made in the normal course of business wholly and exclusively within the objects and investments are of commercial expediency and demonstrated before us with summary of Annual Accounts of the subsidiary companies referred at page 42 with statement of income generated by the assessee company in five years and profit on sale of shares and the provisions of disclosure and accounting standards. The ld. Assessing Officer and ld. Commissioner of Income Tax (Appeals) has highlightened only on the Annual accounts of the assessee company but not the balance sheet and profit
:- 30 -: 24, 144 to 147/2015. and loss account of subsidiary company which incurred loss and which plays vital role in taking decision of write off and also there is no findings on the financial statements of the subsidiary company before the Assessing Officer to disallow the claim. Considering the factual aspects, we are of the opinion that the matter has to be re-examined based on the financial feasibility and losses of subsidiary company in which assessee has made investments and advanced the money for working capital. Therefore, we remit the entire file to the Assessing Officer to decided a fresh and assessee should co-operative in providing the information. This ground of the assessee is allowed for statistical purpose.
On the next ground, the company has claimed interest expenditure on loans. The ld. Assessing Officer has found claim of �77,60,162/- towards interest on borrowed funds. The ld. Assessing Officer made comparison of working capital requirements of the assessee company for two financial years in providing loans and advances to subsidiary and associate companies. The assessee has not collected any interest on advances whereas the assessee has paid interest of �46,63,272/- on loans obtained from another subsidiary company M/s. Accel ICIM Systems and Services Ltd. whereas the assessee is providing loans to subsidiaries and not charging any :- 31 -: 24, 144 to 147/2015.
interest. The ld. Assessing Officer dealt with the provisions of Sec.
36(1) of the Act were the interest on borrowed capita is allowed only if utilized for the purposes of business of the assessee company and relied on the decision of Punjab and Haryana High Court in the case of CIT vs. Abishek Industries Ltd 286 ITR 1 and observed that the assessee company paid interest on borrowed funds without receiving any income or interest from sister concerns or subsidiaries which are enjoying the financial benefits at the cost of assessee company and disallowed interest of �77,60,162/-. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).
In the appellate proceedings, the ld. Authorised 34.
Representative has submitted explanations with supporting judicial decisions and contents on the findings of the Assessing Officer. The ld. Commissioner of Income Tax (Appeals) considered the submissions and case law at page 6 of his order and the transactions between subsidiary company and assessee company are on commercial expediency and relied on the jurisdictional High Court decision of K.
Somasundaram & Bros 238 ITR 939 and dealt exhaustively at page 8 and 9 of order with the reasons for loans and advances provided to subsidiary and the assessee company paying interest to one of the subsidiary company which needs a bank guarantee from the assessee
:- 32 -: 24, 144 to 147/2015. company on their advances. The ld. Commissioner of Income Tax (Appeals) considered the business establishment transactions, commercial expediency, Holding and subsidiary company relations directed the Assessing Officer to restrict disallowance at 3% of outstanding balance as on 31.03.2005 and partly allowed the appeal observed at para 5.2.4 of his order as under:-
‘’5.2.4 In view of the above discussion, it is not ruled out that the appellant has borrowed funds bearing interest and has advanced them to its sister concerns which has nothing to do with its own business. However, it is noticed from the facts of the case that the AO has disallowed the entire interest of �77,60, 162/- debited to its P&L alc on the amounts outstanding in the name of their sister concerns of �12,35,09, 133 as on 31.3.05 as detailed at para 5 of this order. The interest disallowance therefore works out to about 6.28% which' find is on higher side. Further, I have noticed that there is a term loan outstanding as on 31.3.05 of Rs.11,18,031 besides cash credit of Rs.9,94,525. Even though the appellant has not given the details of how these funds were utilized, we cannot jump to the conclusion that these funds out of term loan were used for advancing to sister concerns. There is every possibility that some of the own funds from 19.82 crores might have been diverted towards fixed assets and investments which stand at �.2.23 crores and �10.05 crores respectively, thereby draining out some of the own funds. Since some of the own funds are still available it is also possible that some of them might have also gone for investment in sister concern. But there is no quantification available. Therefore, to meet the ends of justice I direct he AO to restrict the disallowance to 3% of the amount outstanding as on 31.3.05 i.e, Rs.12,35,09, 133 with the sister concerns instead of disallowing the entire interest debited in the P&L a/c. It is directed here to take the end balance amount outstanding as on 31.3.05 for :- 33 -: 24, 144 to 147/2015. convenience sake since the peak credit details are not furnished by the appellant. The ground is partly allowed.’’ Aggrieved by the order, the assessee assailed an appeal before Tribunal.
Before us, the ld. Authorised Representative agitated the 35. grounds that interest has to be allowed in relation to business expediency and the ld. Commissioner of Income Tax (Appeals) has erred in restricting disallowance to 3% and prayed for allowing the appeal.
On the hand, the ld. Departmental Representative relied on 36. the orders of the lower authorities and opposed to the grounds of the assessee.
We heard the rival submissions and perused the material on 37. record. The ld. Authorised Representative contention of allowing total claim is only on the basis of investment in subsidiary company and the ld. Commissioner of Income Tax (Appeals) has restricted the claim to 3% of outstanding balance as on balance sheet date which the assessee challenged. Prime facie the company is a investment company, charging of interest on subsidiary company should be considered as good business principle. Otherwise the financial result
:- 34 -: 24, 144 to 147/2015. will show distress implication on liquidity. The ld. Authorised Representative submissions cannot be accepted without any bonafide evidence. The Commissioner of Income Tax (Appeals) has restricted to 3% of charging of interest on closing balance, we are of the opinion considering the genuineness of transaction payments and usage of funds, the matter has to be examined on the financial implication of the company. Therefore, we set aside the issue for re-examination to the file of Assessing Officer and the ground of the assessee is allowed for statistical purpose.
In the result, the appeal of the assessee is allowed for 38. statistical purpose.
The Revenue has filed an appeal in forassessment year 2005-2006. The Department has challenged the order of CIT(A) on reducing the interest disallowance from 6.28 % to 3% on the outstanding balance of sister concern as on 31.03.2005 and the assessee has not submitted any peak credit details. The Commissioner of Income Tax (Appeals) considered the issues without any explanation of assessee for providing such interest free advance to sister concerns/subsidiary. We heard the arguments of the Departmental Representative and ld. Authorised Representative on disputed issue, since the assessee appeal is remitted to the file of :- 35 -: 24, 144 to 147/2015.
Assessing Officer for re-examination, we also remit the Department appeal to the Assessing Officer.
In the result, the appeal of the Department is allowed for statistical purpose.
In the result, the Department Appeals in ITA 41.
No.144/Mds/2015 is dismissed, 146 & 147/Mds/2015 are partly allowed for statistical purpose and assessee appeals in ITA Nos.23 & 24/Mds/2015 are also allowed for statistical purpose.
Order pronounced on Friday, the 20th day of May, 2016, 42. at Chennai.